Should You Open a Second Location Before You Franchise Your Business?

Dec 23, 2015

One thing you may hear from time to time as you evaluate franchising as an option to grow your business is that you cannot franchise unless you have at least two operating units. In fact, nothing could be farther from the truth. An interesting case in this regard was Massage Envy, which started franchising when it had only a single unit in operation and today has more than 1,000 locations.

Of course, opening a second location has a number of advantages. It will allow you to test different aspects of the business, demographics, and types of sites. It will improve your cash flow. It will increase your credibility.

Two units are almost always better than one. And three are almost always better than two. Five are better than three. And 10 are better than five.

But you cannot answer the question of whether you should open a second company unit before franchising in a vacuum. And saying that opening more company-owned units is empirically the better decision fails to account for issues of competition, timing, and focus. While having more operating locations could increase your credibility, the impact on your close rates will likely be relatively small. With the average close rate on franchise leads now at about 2 percent, this increase in credibility might bump the close rate up to 2.2 percent.

When you consider that a franchisor looking to sell 12 franchises a year needs to generate about 600 leads to achieve that goal, that incremental increase would be responsible for just about one additional franchise sale in the first year. Alternatively, it would allow you to decrease your franchise marketing budget by about 10 percent — saving about $9,600 in today’s market.

Measure that savings against the cost of starting your franchise efforts a year sooner, and the financial choice quickly swings in favor of franchising sooner. This is especially true when considering where each of these choices would take you in year two.

An entrepreneur who spent a year opening their second location would have two operating locations and could now offer franchises with the expectations of a 2.2 percent close rate. In contrast, an entrepreneur who spent a year franchising with a lower 2 percent close rate would have one corporate location but perhaps 10 to 12 franchise locations — allowing them an even higher close rate, more publicity, and a faster jump on competitors.

And this doesn’t even account for the possibility that the second unit could end up being a distraction, underperform, or allow a competitor to gain a “first mover” advantage in your industry or in the market(s) you wish to develop.

We’ve often seen people delay the decision to franchise because they either have an opportunity to capitalize on a particular site or there’s some other reason of convenience. But again, the question they should be asking is whether the resources they’d need to spend on a second operating location will ultimately provide the best incremental returns or allow them to pursue their best alternative growth strategy.

That said, there are certainly times when opening a second or third unit could be your best strategy. In some instances, an entrepreneur might need to test different types of locations or refine different aspects of the business before moving ahead with franchising. This is particularly true if the first location isn’t considered a reasonable prototype for the business format or a location that would ultimately be offered to franchisees. If the first unit isn’t providing adequate returns to move ahead with franchising, a company shouldn’t use it as the model for franchise operations and must refine it first. But when looking at the question objectively, if franchising is your chosen expansion strategy, starting sooner will often have incremental long-term benefits.